A Merrill Lynch analyst reportedly has upgraded General Motors shares two notches to “buy” from “sell,” on the increased belief that the automaker will use its cash to turn its business around.

Analyst John Murphy also cut Ford to “sell” from “neutral,” based on a “stretched” valuation and the risk that the company won’t turn itself around in the next three years, The Associated Press (AP) said.

According to the news agency, Murphy said Ford chief executive Alan Mulally is “making progress,” but the company faces strong challenges, like getting out of a product slump, particularly with the large F-series trucks.

On General Motors, Murphy noted that the company’s pension fund is over-funded by $US17bn, that pressure is mounting for change in the company’s health care plan, and that the company will be able to borrow more money with its factories as collateral, AP said.

“The resulting sentiment is increasingly more optimistic and is trumping our previous expectation of pressure early in 2007,” Murphy said in a research note cited by the Associated Press.